Surging demand for commodities from emerging markets should prompt investors to focus on the Labor Department’s main measure of inflation to gauge price increases, according to Pacific Investment Management Co.’s Bill Gross.
Most economists concentrate on the so-called core inflation data, which strips out price changes from food and energy, because commodity prices are volatile and tend to revert to the mean, Gross, the manager of world’s biggest bond fund, said in a radio interview on “Bloomberg Surveillance” with Tom Keene.
“To focus on the core as opposed to the headline would neglect the fact that emerging market countries have significantly higher demands not just for oil, not just for energy but also for food and commodity-related products,” Gross said from Pimco’s headquarters in Newport Beach, California. “The mean reversion that Fed theorist expects may not occur. I would focus on the headline going forward.”
The cost of living in the U.S. climbed more than forecast in December, led by higher fuel and food prices, while other goods and services showed the smallest annual gain on record. The consumer price index rose 0.5 percent, more than the 0.4 percent median estimate of economists surveyed by Bloomberg News, Labor Department figures showed Jan. 14. The core rate rose 0.1 percent, in line with the median projection.
Investment managers are incorrectly measuring future inflation expectations, Gross wrote in his monthly investment outlook released on Pimco’s website Feb. 2. Because of so-called easy monetary policies in developed countries, combined with larger debt loads and increasing inflation expectations, investors in developed market sovereign debt are taking a “haircut,” he said.
This will continue as the Federal Reserve is unlikely to raise interest rates for at least 12 months because the U.S. economy isn’t generating enough growth to lower unemployment, Gross said today. The central bank would probably like to see the economy adding at least 200,000 jobs a month before considering rate increases, he said.
The U.S. jobless rate unexpectedly fell in January to the lowest level since April 2009, while payrolls rose less than forecast, depressed by winter storms.
Unemployment declined to 9 percent last month from 9.4 percent in December, the Labor Department said today in Washington. Employment rose by 36,000 workers, the smallest gain in four months, after a 121,000 rise in December that was larger than initially reported. Payrolls were projected to climb 146,000, according to the median forecast in a Bloomberg News survey.
Holdings of Treasuries and U.K. gilts should be cut because of the unattractive returns from real yields, and investors should invest in emerging market countries with strong balance sheets, growth and the potential for currency appreciation, said Gross, who founded Pimco and serves as co-chief investment officer with Chief Executive Officer Mohamed El-Erian.
“Investors need to focus less on duration and move money outside the U.S. and euro zone to emerging markets where there is higher growth and higher interest rates,” Gross said.
Sovereign and corporate debt in emerging-market countries with higher real interest rates, wider credit spreads and strong balance sheets are more attractive, he said. That will offer more return as well as protection from dollar depreciation as U.S policy makers run up record deficits at the expense of economic growth, Gross wrote.
Total Return Fund
Gross cut the proportion of U.S. government and related securities in the Total Return Fund he manages to 22 percent of assets in December from 30 percent in November, according to a report placed on the company’s website on Jan. 14. He raised holdings of mortgage debt in December to 45 percent, the highest level since July 2009, from 43 percent as prices of government securities fell.
The $239 billion Total Return Fund posted a 7.07 percent gain in the past year, beating 82 percent of its peers, according to data compiled by Bloomberg. It has lost 0.08 percent in the past month. Pimco is a unit of Munich-based insurer Allianz SE.
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